Why the world needs NFT Finance

Real-world use cases for borrowing capital against NFT assets

Read now on substack -> https://thegenesisblock.substack.com/p/why-the-world-needs-nft-finance?s=w

TL;DR

• Using NFTs as collateral shouldn’t be an alien concept, borrowing and lending has been around since the dawn of human civilization
• As NFTs become increasingly ingrained in our lives over the next decade, we will see increasing financialization of NFTs and lending is a natural starting point
• Lending platforms are solving real problems for users right now; for example, users shut out of the traditional financial system due to their early adoption of Web3 technology and new ways of working
• As more real-world assets come on-chain, the possibilities of NFT Finance will increasingly become endless

Introduction to NFT financialization

Using NFTs as collateral to borrow money sounds like an alien concept to anyone not already deep down the Web3 rabbit hole. NFTs are still thought of by most people outside the ecosystem as “overpriced JPEGs with no purpose”. But that’s starting to change with an increasing rate of innovation and valuable experiments playing out, from exclusive communities, immersive real-life experiences to real-world assets being brought on-chain.

Whether you believe there is value in the current iteration of NFT projects or not, NFTs are going to become more ingrained in everything over time from real-world property rights to your birth certificate. They will touch almost all areas of our lives and the financialization of NFTs will be a significant theme over the coming years.

Borrowing and Web3

Borrowing as a concept has been around for thousands of years, since the dawn of human civilization. The concept has essentially remained unchanged, someone with excess capital lends it to a borrower who can put it to work, with the trust it will be paid back in the future. Lending has fueled national, commercial and industrial economies and without it, it’s hard to believe human civilization would be where it is today.

Borrowing and lending in Web3 is a natural progression of a long-established practice as individuals and businesses interact using permissionless smart-contracts and blockchain technology.

Platforms such as NFTfi are pioneering this in the NFT space and experience significant growth from unlocking liquidity in an illiquid asset class.

Who borrows money using NFTs as collateral?

I’ve broken out a few example ‘borrower personas’ and have provided a few thoughts as to how this might evolve over time.

NFT Traders

NFT owners looking for financial leverage secured against their existing portfolio. Borrowing money against assets to enable trading is commonplace in traditional financial markets, used by individuals and institutions alike. Using a portfolio of NFTs as collateral enables traders to invest in other attractive NFT projects or DeFi without the need to sell existing NFTs that either offer utility or that might continue to go up in value, thereby optimizing yield for a given exposure.

Crypto-Native Collector

NFT owner who, for example, might work informally or for a DAO without a ‘traditional’ income stream that would be recognized by a bank, but still needs to pay for real-world expenses or purchase real-world assets like a house. These users could borrow money against their NFT assets that just wouldn’t be viewed as an ‘asset’ by a TradFi lender such as your household bank. This provides an important lifeline for many crypto native individuals who are cut out of the real-world financial system due to their early adoption of Web3 technology and a new way of working and organizing societies.

Tax Optimizer

Depending on a user’s jurisdiction (e.g. most of Europe) selling an asset for a profit could trigger a taxable event, i.e. you own the tax office a % of whatever you made. To avoid triggering a taxable event such as a sale, some users may instead choose to free up capital by borrowing money against their NFTs instead of selling them, even if just temporarily until the next tax year rolls around.

Portfolio Protection Seeker

Some NFT holders might want to hedge themselves against an extreme downside volatility event. In this scenario a borrow against their NFTs and then stop making repayments (i.e. default) on the loan if the NFT price drops below the loan value. In this scenario, the borrower would lose the NFT, but this doesn’t matter as the loan is now worth more than the NFT. This is a bit like buying a put option, where the premium is the interest on the loan and the LTV is the strike.

Looking ahead…

Real-world asset liquidity seeker

As more assets get brought on-chain by companies such as Koia, any individual or company who currently borrows money against a real-world asset could use a decentralized lending protocol to borrow against that asset.

Conclusion

Borrowing and lending as concepts have been around since the dawn of human civilization and have played a key role in civilizations’ development.

There are four primary borrower personas currently utilizing platforms such as NFTfi including;

• NFT Traders,
• Crypto Native Collectors,
• Tax Optimizers, and;
• Portfolio Protection Seekers

As NFT use cases expand far beyond what might look like very primitive use cases today when we look back in 5 years, the requirement for NFT lending and borrowing will grow exponentially. I’m personally most excited about more real-world assets being brought on-chain and NFTs being increasingly financialized.